A question that commonly arises when we are assisting clients with preparation of an Adjudication Application or Response, is: “How is the Adjudicator going to value the construction works (or related goods and services)?”
Knowing how an Adjudicator will value the works is particularly important given the very short timeframes provided for parties to an Adjudication Application to prepare their submissions and supporting documents.
Section 22(2) Building and Construction Industry Security of Payment Act 1999 (NSW) (“the Act”) provides that when determining an Adjudication Application an Adjudicator is required to consider the provisions of the Act, the provisions of the relevant Construction Contract, the Payment Claim, the Payment Schedule and the submissions (including relevant documentation) duly made by the parties.
In valuing construction work (or related goods or services) the Adjudicator is, therefore, bound to consider Section 10 of the Act which provides that construction work is to be valued:
- in accordance with the terms of the contract, or
- if the contract makes no express provision with respect to the matter, having regard to:
- the contract price for the work,
- any other rates or prices set out in the contract,
- any variation agreed to by the parties to the contract by which the contract price, or any other rate or price set out in the contract, is to be adjusted by a specific amount, and
- if any of the work is defective, the estimated cost of rectifying the defect.
Related goods and services are valued in the same way as construction works, except that, in the case of materials and components that are to form part of any building, structure or work arising from construction work, the only materials and components to be included in the valuation are those that have become (or, on payment, will become) the property of the party for whom construction work is being carried out.
Therefore, if the Construction Contract sets out a clear a method or basis for valuing the works, the Adjudicator should value the works based on that method or basis. For example, a contract may state that the works are to be valued by reference to a percentage of the contract price based on staged completion or by the hours worked and a schedule of rates.
If the Construction Contract does not expressly provide for how the works are to be valued, however, then the Adjudicator will look at the remaining matters set out in Section 10 of the Act, being the contract price, any other rates or prices set out in the contract, any agreed variations to adjust the contract price or rates, any agreed variations and the estimated cost of rectifying any defects.
Other important points to note in relation to how the Adjudicator will value the construction works (or related goods or services) are that:
- The Adjudicator will value the works as at the applicable Reference Date.
- The Adjudicator must only value works which are included in the Payment Claim to which the Adjudication Application relates, and not, for example, any other work which may have subsequently been carried out and claimed in the Application.
- If there has been a previous Adjudication Application in which an Adjudicator made a Determination in relation to the value works, in any subsequent Adjudication Application the Adjudicator is required to give the same value as that previously determined unless one of the parties satisfies the Adjudicator that the value has changed since the previous Determination. This only applies, however, where the previous Adjudicator has valued the works, and not for example, where an Adjudicator has determined that there is no entitlement or that the works cannot be valued.
- If one party has placed a value for an item that is not challenged or disputed, it is not necessary for the Adjudicator to independently value that item or claim. The Adjudicator may accept that value and apply the claimed amount.
As such, when preparing submissions, it is very important to ensure that all disputed items of work are in fact disputed and challenged in that party’s submissions and supported by relevant documents.
- Another common issue arises when the Construction Contract provides for works to be valued by way of an Architect or Superintendent issuing a Superintendent’s Certificate or the like. This type of provision is often included in larger Construction Contracts.
In the past the Courts have taken varying approaches to the question of whether an Adjudicator is required to follow a Superintendent’s Certificate rather than valuing the works independently.
The current approach taken by the NSW Court of Appeal is that if an Adjudicator fails to follow a Superintendent’s Certificate this may amount to an error of law, but even so it does not render the Adjudicator’s Determination invalid (see Abacus v Davenport  NSWSC 1027 and Transgrid v Walter Construction Group  NSWSC 21).
On the present law, an Adjudicator can, therefore, effectively step into the shoes of an Architect or Superintendent when valuing the works, and does not have to simply accept the Superintendent’s Certificate.
There is still much debate about whether the failure by an Adjudicator to follow a contractual provision for the Superintendent to fix value is an error of law or is a more fundamental failure to follow the basic requirements of the Act.
- An Adjudicator is not required to follow a particular mechanism in a contract for the valuing of the works, but only criteria by which the works are to be valued.
- Likewise, any clause in the contract which caps the maximum value of the contract in order to deny a claim and the right to value work in accordance with the contract, may be viewed as contracting out of the Act and therefore invalid.
The Courts have acknowledged that valuing the works can sometimes be a difficult task for an Adjudicator, but the Adjudicator must undertake this task in accordance with the Act and provide sufficient reasons for the Determination.
Given the significant rights that accrue in utilising the Act to claim payment or dispute liability for a payment, you should always seek specialist advice from an experienced Building & Construction Lawyer when negotiating and entering into a Construction Contract and, in particular, when preparing or responding to an Adjudication Application, to ensure your rights are protected.
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By Felicity Donald,